Expert Update

Injunctive and Damages Remedies Available in a Patent Infringement Case

Published in the Patent Law and Litigation Edition, St. Louis Bar Journal, Vol. XLVII, No. 2, Fall 2000

By Joseph E. Walsh, Jr., Esq. and Mark E. Hoffman

It can be argued that technology has never been as vital to the success of an enterprise as it is today. Thus, in the current age of sweeping e-commerce, high-tech telecommunications and biotechnology, businesses that neglect to consider a patent strategy to protect their important products and methods that distinguish them from their competition are destined to fail.

While vital, however, patents do not assure commercial success and the assertion of patent infringement with a claim for damages carries with it a number of requirements, considerations and proofs peculiar to this form of intellectual property.2 Given the dependence of many businesses upon their patents and the high stakes and large sums of money that frequently attend patent disputes, failure to appreciate certain of the unique concepts embodied in patent infringement remedies law will, similarly, result in failure.

Patent infringement remedies are meted out in the federal district courts because patent rights derive from federal statutes and, thus, give rise to issues of federal question.3 Although patent issues may be appealed as high as the United States Supreme Court, and while Supreme Court precedent certainly governs many of the most import issues affecting patents, the practical court of last resort in patent matters is the Court of Appeals for the Federal Circuit (“CAFC” or “Federal Circuit”). Having limited jurisdiction and specially created in 1982 to, among other things, decide patent appeals, the CAFC has exclusive jurisdiction over all appeals from patent cases in federal district courts.4 Thus, much of the precedent for patent infringement remedies and damages issues is founded upon Federal Circuit authority.

Given the complexity of the subject matter, numerous books, articles and treatises have been written on patent infringement remedies and damages. As such, it is not possible to thoroughly address all aspects of the remedies and damages theories that pertain to patent infringement in the context of this limited space. Rather, the purpose of this article is to lay a groundwork on the subject of patent infringement remedies and damages, introduce the reader to the prevailing theories of legal redress and, at the same time, provide the reader with an appreciation for the complexity of the analysis that typically characterizes a claim for patent infringement damages.

Preliminary and permanent injunctions are provided for under § 283 of the Patent Act.5 Whether a preliminary injunction will issue in a case of patent infringement depends upon four factors; namely: 1) the moving party’s reasonable likelihood of success on the merits; 2) the harm the moving party will suffer if preliminary relief is not granted; 3) the balance of the hardships between the moving party and the party to be enjoined; and 4) the impact, if any, on the public interest.6 After infringement of a valid patent claim is found, the claimant is entitled to entry of a permanent injunction against future infringement.7

While an injunction may no doubt be the most valuable remedy sought by a patentee in a case of infringement, the same standards are applied in hearing and granting injunctive relief in patent cases as are applied in other federal cases.8 For this reason, and because many are at least somewhat familiar with these standards, the balance of this article focuses on the lesser known damages component of patent infringement and certain of the unique concepts that distinguish a patent damages claim from other intellectual property damages claims and tort damages claims generally.

B. Damages

Fundamentally, the law that has developed concerning patent infringement damages differs from damages available in other types of intellectual property infringement in that it has not embraced the concept of “disgorging” an infringer’s profits. Thus, in cases of patent infringement, the infringer’s profits are not recoverable.9 Nevertheless, and despite this undisturbed precedent, the Federal Circuit has, in certain cases, allowed the infringer’s profits to serve as a measure of the patentee’s lost profits.10

The patentee’s lost profits are one recognized form of compensable damages for patent infringement. The other recognized measure of a patentee’s damages for patent infringement is a reasonable royalty. These damage theories are discussed separately below and the measure of the patentee’s recovery under both of these damage theories is governed by 35 U.S.C. § 284 which provides that “upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use of the invention by the infringer, together with interest and costs as fixed by the court.” The amount of damages is a question of fact11 and patent infringement damages cannot be speculative, but need not be proven with absolute precision.12

1. Lost Profits

The patent owner’s actual losses, measured as the loss of profits, is one possible measure of “damages adequate to compensate for the infringement.” Proof of lost profits must include two elements: (1) a showing of causation, i.e. that the patent owner would have made additional sales “but-for” the infringement, and (2) evidence for the computation of the loss of profits.13 Lost profits damages may be measured based upon the causation factors set forth in Panduit Corp. v. Stahlin Bros. Fibre Works, Inc.14 Under the Panduit test, the patentee must prove four factors to establish lost profits. The four factors are: (1) a demand for the products covered by the patent; (2) an absence of acceptable non-infringing substitutes to the patented product or process; (3) that the patentee possessed the manufacturing and marketing capabilities to exploit the demand; and (4) the amount of profit the patentee would have made had the infringement not occurred.

Special Note: In the twenty years since Panduit, many of the cases have turned on the application of factor (2) requiring the patentee to prove an absence of acceptable non-infringing substitutes to the patented product or process. In many of those cases, it has been held that “[I]t is not [emphasis added] necessary for the patent holder to negate all possibilities that a purchaser might have bought a different product or might have foregone the purchase altogether.”15

However, in Grain Processing v. American Maize-Products16 — a case decided last summer by the Federal Circuit, the court upheld the district court’s decision denying lost profit damages to Grain Products Corporation (“GPC”) on the basis of a non-infringing alternative product made by a method American Maize-Products (“AMP”) first introduced in the last year of the term of GPC’s patent despite the fact of infringement years earlier. Thus, “with proper economic proof of availability [emphasis added], as American Maize provided the district court in this case, an acceptable substitute not on the market during the infringement may nonetheless become part of the lost profits calculus and therefore limit or preclude those damages.”17 Thus, there is now precedent for the proposition that an accurate reconstruction of the hypothetical “but for” market takes into account any alternatives availableto the infringer not just those that were actually produced and sold during the infringement.

When more than two suppliers exist in the relevant product market, the Federal Circuit held in State Industries, Inc. v. Mor-Flo Industries, Inc. that a patent owner may satisfy the second Panduit element by substituting proof of its market share for proof of the absence of acceptable non-infringing substitutes.18 Under this “market share” approach, the patentee substitutes proof of its market share for proof of the absence of acceptable non-infringing substitutes, calculating damages based upon its market share.

2. Reasonable Royalty
When actual damages cannot be proved, or are not sought for reasons of proof, trial strategy or otherwise, the patent owner is entitled to not less than a reasonable royalty as damages. The usual assignment for an expert witness is to indicate what would be a reasonable royalty between the parties, taking the judicially and commercially relevant circumstances into account. Since the statute provides that damages will not be less than a reasonable royalty, this level is the judicially acceptable minimum for damages. The “purpose of the royalty alternative is not to direct the form of compensation, but to set a floor below which damage awards may not fall.”19

Authoritative guidelines for interpreting and applying Section 284 were provided by the first Chief Judge of the Federal Circuit Howard Markey, in Fromson v. Western Litho and Supply Co.20 Judge Markey’s comments in the case opinion expressed his views in connection with the statutory language “damages adequate to compensate for the infringement” and in any event “not less than a reasonable royalty.” His comments included:

As used in Section 284 ‘reasonable royalty’ is handy shorthand for damages. As the statute provides, the royalty is ‘for the use of the invention by the infringer.’ Thus the calculation is not a mere academic exercise in settingsome percentage figure as a ‘royalty.’ The determination remains one of damages to the injured party.
Reasonable royalty was defined in Panduit Corp. v. Stahlin Bros. Fibre Works as “an amount which a person desiring to manufacture and sell a patented article, as a business proposition, would be willing to pay as a royalty and yet be able to make and sell the patented article in the market at a reasonable profit.21 The determination of a reasonable royalty between the patentee and a would-be licensor in the absence of an arms-length agreement is a matter of much dispute. Reasonable royalty may be based upon an established royalty, or if an established royalty does not exist, reasonable royalty may be determined based upon a hypothetical negotiation between a willing licensor and willing licensee.22

An established royalty has been defined as a royalty “paid by such a number of persons as to indicate a general acquiescence in its reasonableness by those who have occasion to use the invention.”23 This definition indicates that more than a single license agreement is generally required to demonstrate uniformity among multiple licensees. General acquiescence also implies a willing licensor and licensee, rather than a mere offer to licensee. Offers to license may be in the form of a “carrot” or a “stick” license. Offers to license after infringement began and under the threat of litigation (stick license) “should not be considered evidence of an ‘established royalty,'” because “license fees negotiated in the face of a threat of high litigation costs ‘may be strongly influenced by the desire to avoid full litigation….'”24 An established royalty may be a strong indicator of the amount of reasonable royalty. “Where an established royalty rate for the patented inventions is shown to exist, the rate will usually be adopted as the best measure of reasonable and entire compensation.”25

Absent an established royalty for the infringing conduct, a reasonable royalty may be determined after infringement based upon a hypothetical negotiation.26 The landmark Georgia-Pacific Corp. v. U.S. Plywood-Champion Papers case listed 15 factors representing the guidelines provided by the court for determining what would be a reasonable royalty based upon a hypothetical negotiation following a finding of patent infringement in that case.27 The broadest of these factors is the 15th Georgia-Pacific factor, which is the overall hypothetical negotiation embodying the first thirteen factors:

The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon at the time the infringement began if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee ­ who desires, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention ­ would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license.
The principle articulated in the 15th Georgia-Pacific factor hypothecates the parties entering into a fictitiously agreed upon license on the date of first infringement. The court in Panduit commented on this hypothetical negotiation, explaining that:

Determination of a ‘reasonable royalty’ after infringement, like many devices in the law, rests on a legal fiction. Created in an effort to ‘compensate’ when profits are not provable, the ‘reasonable royalty’ device conjures a ‘willing’ licensor and licensee, who like Ghosts of Christmas Past are seen dimly as ‘negotiating’ a ‘license.’ There is, of course, no actual willingness on either side and no license to do anything, the infringer being normally enjoined…from further manufacture, use, or sale of the patented product.28
The court also recognized that a reasonable royalty, as damages for infringement, might be treated differently than the royalty that would result from a hypothetical negotiation between a willing licensor and willing licensee. In this regard, the court observed that:

The setting of a reasonable royalty after infringement cannot be treated … as the equivalent of ordinary royalty negotiations among truly ‘willing’ patent owners and licensees. That view would constitute a pretense that the infringement never happened. It would also make an election to infringe a handy means for competitors to impose a ‘compulsory license’ policy upon every patent owner. 29

Increasing the royalty to compensate the plaintiff for the trouble of obtaining a royalty through litigation has became known as a Panduit “kicker.” The Federal Circuit rejected a trial court’s award of a kicker, observing that such a kicker is not compensatory.30 However, shortly thereafter, a different Federal Circuit panel affirmed an award of damages that exceeded the reasonable royalty. The court stated in part that “the fact that an infringer had to be ordered by a court to pay damages, rather than agreeing to a reasonable royalty, is also relevant.”31

The 14th Georgia-Pacific factor is “the opinion of qualified experts.” This factor mirrors the 35 U.S.C. § 284 statutory provision that “the court may receive expert testimony as an aid to the determination of damages or what royalty would be reasonable under the circumstances.” Id. The remaining 13 Georgia-Pacific factors that a damages expert may consider in formulating his opinions as to the amount of reasonable royalty damages are:

1) The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.
2) The rates paid by the licensee for the use of other patents comparable to the patent in suit.
3) The nature and scope of the license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold.
4) The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.
5) The commercial relationship between the licensor and the licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter.
6) The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales.
7) The duration of the patent and the term of the license.
8) The established profitability of the product made under the patent; its commercial success; and its current popularity.
9) The utility and advantage of the patent property over the old modes or devices, if any, that had been used for working out similar results.
10) The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention.
11) The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use.
12) The portion of the profit or selling price that may be customary in the particular business to allow for the use of the invention or analogous inventions.
13) The portion or the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.
The Georgia-Pacific factors are not considered exhaustive or the only approach to determining what constitutes a reasonable royalty in all cases. While the Georgia-Pacific factors represent an earnest effort by the court to provide guidelines for determining a reasonable royalty following a finding of patent infringement in that case, many other factors may also influence licensing royalties in other circumstances. “The amount of a reasonable royalty after infringement turns on the facts of each case, as best they may be determined.”32

The Georgia-Pacific case dates back to 1970. The more recent 1992, Honeywell v. Minolta case included jury instructions listing a modified version of royalty factors representing guidelines for determining reasonable royalty.33 The three reasonable royalty determination factors that were added in the Honeywell case are: (1) the relative bargaining positions of the parties, (2) the extent to which the infringement prevented Honeywell from using or selling the invention, and (3) the market to be tapped. Honeywell appears to place more emphasis on an analytical determination of profits, changing Georgia-Pacific factor 12 to read “what the parties reasonably anticipated would be their profits or losses as a result of entering into a license agreement.”

3. Supplemental Damage Theories

When considering lost profits or reasonable royalty measures of patent infringement damages, courts have recognized that “the economic value of a patent may be greater than the value of the sales of the patented part alone.” Under this rule, courts have allowed recovery of lost profits or a reasonable royalty based not only on the profit from the patented part, but also on non-patented parts.34 This concept is referred to as the “Entire Market Value Rule.” In order to fully compensate a patentee for his loss due to infringement, a number of supplemental damage theories have emerged under the Entire Market Value Rule. Recognized examples of supplemental damage theory claims include: i) price erosion; ii) convoyed sales; and iii); accelerated market entry damages. These supplemental theories are discussed below.

(i) Price Erosion

This supplemental theory recognizes lost profit damages due to price reductions or other discounts the patentee had to make in order meet competition created by the infringer35 or the mere existence of the infringer in the market.36 Price erosion damages are usually determined by comparing the sales price of the patented product prior to infringement to the sale price of the same product during infringement.37 Price erosion damages have also been awarded upon a showing that patentee would have raised prices but-for infringer’s presence in the market.38

(ii) Lost Profits on Sales of Unpatented Items

Items sold as a consequence of sales of the patented product are often referred to as “collateral” or “convoyed” sales. When unpatented items normally sold with or as a result of the sale of patented items, recovery of damages may be awarded if the patent related feature of the item (which also contains unpatented features) is the basis for customer demand.39 In the landmark case of Rite-Hite Corp. v. Kelley Co., the Federal Circuit established, however, that damages are recoverable under this theory only if the patented and unpatented components together are “analogous to components of a single assembly . . . parts of a complete machine or constitute a functional unit but not where the unpatented components have essentially no functional relationship to the patented invention and . . . may have been sold with an infringing device only as a matter of convenience or business advantage.”40

(iii) Accelerated Market Entry Damages

Accelerated market entry damages (sometimes referred to as “accelerated re-entry damages”) may be applicable when an infringed patent is close to expiration or has expired. These damages measure and compensate the patentee for his future loss of profits caused by the patent infringement. The infringement causes the patentee to experience reduced sales and profits in the future as a result of the head start that the infringer will enjoy after the patent monopoly expires. The theoretical premise behind this element of damage is that the infringer impermissibly obtained market share before the patent monopoly expired, thus giving him an unlawful competitive head start prior to the expiration of the patent. The infringer thereby starts from an established customer base, rather than starting at zero where he otherwise would have started had the infringement not occurred.

II. Enhanced Damages

The Patent Statute also allows a court to increase the patentee’s damages by up to three times the amount determined as actual damages.41 While the statute does not prescribe the standards for determining the appropriateness of an increased damage award, the courts generally consider the following nine factors: 1) whether there was deliberate infringement; 2) whether the infringer, when on notice of the patent, took reasonable steps to investigate the scope of the patent and formed a good faith belief that it was invalid or that it was not infringed; 3) the infringer’s behavior as a party to the litigation; 4) the infringer’s size and financial condition; 5) the closeness of the case ; 6) the duration of the infringer’s misconduct; 7) the remedial action taken by the infringer; 8) the infringer’s motivation for the harm; and 9) the infringer’s attempts to conceal its infringement.42

III. Prejudgment Interest

Under 35 U.S.C. § 284 prejudgment interest on damages is recoverable. Prejudgment interest should be awarded in most patent infringement cases because prejudgement interest is necessary to fully compensate the patentee.43

IV. Attorneys’ Fees

The court in “exceptional” cases may award reasonable attorneys’ fees to the prevailing party.44 Requests for attorneys’ fees usually arise after a finding of willful infringement and factors concerning the parties’ conduct both during the infringement and trial often dictate whether attorneys’ fees are awarded. A district court’s decision to award attorneys’ fees involves: 1) a factual finding that the case is “exceptional;” and 2) a determination that an award of attorneys’ fees is appropriate, a determination that is reviewed for an abuse of discretion.45

V. Conclusion

Remedies for patent infringement in the United States include injunctive relief (both preliminary and permanent) and damages. Damages can be proven either by establishing a patentee’s lost profits or by resort to a hypothetical market analysis of the patented device wherefrom a reasonable royalty can be determined.

Under a principle known as the “Entire Market Value Rule,” several supplemental damages theories exist which are designed to compensate the patentee for the total harm done by virtue of the infringement. To recover under any of the supplemental damages theories, however, the claimed damages must not be speculative. Thus, in addition to recovering actual damages based upon the fact of infringement, a patentee may, for example, also recover damages for the erosion in price that has occurred to his product, his lost profits on unpatented products or components sold in conjunction with the patented product and based on the competitive advantage gained by the infringer in developing market share prior to the expiration of the patent.

Enhanced damages are statutorily provided (up to three times proven actual damages) and, within the discretion of the court, are awarded to a patentee based upon a number of factors used to gauge the egregiousness of the infringement. Attorney’s fees and costs can also be recovered in “exceptional cases” where the conduct of the infringer so warrants.

For purposes of this article, all references to patent(s) will be to utility patents statutorily provided for under 35 U.S.C. § 100 et. seq. and not design or plant patents which, although interesting in their own right, are outside the purview of this article.